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Kelley v. Kelley

United States District Court, D. Massachusetts

April 12, 2019

BRITTANY KELLEY and WINDY KELLEY, Plaintiffs,
v.
WILLIAM R. KELLEY, JR., Defendant.

          MEMORANDUM AND ORDER

          INDIRA TALWANI UNITED STATES DISTRICT JUDGE.

         Before the court are motions and filings from Plaintiffs Brittany and Windy Kelley, Defendant William R. Kelley, Jr., Receiver John Ottenberg, and the United States, asking the court to resolve: (1) whether a Receivership Order allows for Plaintiffs' perfected judgment liens to be paid before federal capital gains taxes that arise from the sale of properties sold to satisfy such liens; and (2) if not, whether the Receivership Order should be modified. For the reasons set forth below, the Receivership Order as issued does require the Receiver to pay such taxes prior to payment to Plaintiffs. Consistent with the Tax Lien Act, the court modifies the Receivership Order, nunc pro tunc, to reflect the priority of Plaintiffs' liens' over federal capital gains taxes that arise from the sale of property sold to satisfy such liens. Accordingly, Plaintiffs' Motion for Order that No. [Federal] Capital Gains Taxes Be Paid on the Sale of 64 Revere Street [31] is ALLOWED in part and the Receiver's Motion for Instructions, in the Nature of an Action for Interpleader, Regarding Distribution of Funds in his Custody [50] and Motion for Instructions Regarding the Payment of 2018 Taxes to Massachusetts and Utah [59] are ALLOWED.

         I. Background

         In 2014, Plaintiffs obtained a civil judgment against Defendant for approximately $15 million in Plymouth County Superior Court. Mem. of Decision and Order on Pl.'s Mot. to Appoint Receiver (“Receivership Order”) 1 [31-2]. With interest, the judgment amounted to nearly $19 million in 2017, when the Superior Court found the record warranted the extraordinary remedy of an appointment of a receiver “to secure the payment of some portion of the damages that are due to plaintiffs.” Id. at 2. The Superior Court appointed the Receiver, and directed him to take custody of Defendant's property and income, and to liquidate the Defendant's assets to effect the satisfaction of the Plaintiffs' judgment and the Defendant's other creditors with a distribution of the proceeds. Id. at 4. The Receiver was directed to sell the assets “subject to any prior liens” that are valid, outstanding, and superior to the Plaintiffs' judgment, and until the assets could be disposed of on commercially reasonable terms, to maintain the property, and to pay “taxes, assessment, or mortgage installments falling due. . .” Id. at 5. The Receiver was also directed to disburse to the Plaintiffs (and another) “the proceeds from the liquidation of any [a]sset, after the payment of all applicable federal and state income taxes or capital gains taxes, until the defendant's obligations to the plaintiffs [and another] are satisfied in full.” Id. at 7-8.

         Plaintiffs and Defendant reached an agreement for the liquidation of Defendant's properties and the court entered an Order Authorizing Liquidation Plan (“Liquidation Plan”) 39-47 [1-3]. The Liquidation Plan primarily addresses Defendant's obligations and the distribution of proceeds to the Defendant. As a part of the Liquidation Plan, Defendant “release[d]…any estate of homestead created under Mass. Gen. Laws c. 188 s. 3 or 4, pursuant to G.L. c. 188 s. 10(a)(2), and otherwise waive[d] any homestead rights.” After the sale of one of Defendant's properties, a dispute arose as to the payment of capital gains taxes. Specifically, Plaintiffs argued that “applicable” capital gains taxes to be paid following the sale of the property included only those with a priority over Plaintiffs' claims, no such taxes had a priority over Plaintiffs' claims, and therefore, no capital gains taxes were “applicable” under the Receivership Order. Pls.' Mot. for an Order that No. Capital Gains Taxes Be Pain on the Sale of 64 Revere Street (“Pls.' Mot.”) [31]. Defendant disagreed, contending that, under the Receivership Order, the capital gains taxes that arose from the sale of the property needed to be paid prior to satisfying Plaintiffs' judgment. Trial Court Record at 507 [32].

         The Receiver paid state taxes on the sale of the property and agreed to hold the payment of federal taxes until the court could rule on Plaintiff's motion. Once that motion was filed, the Superior Court issued a notice to the Internal Revenue Service, inviting the United States' response. Trial Court Record at 2 [1-3]. The United States removed this case pursuant to 28 U.S.C. § 1442, Notice of Removal [1], and responded to Plaintiff's motion here. Upon joint motion of the United States, the Receiver, and Plaintiffs, the court partially remanded the case to state court, retaining jurisdiction over the United States' claims. Order of Partial Remand [24]. This court retained jurisdiction limited to resolving “any issues regarding the priority of the claims by the Plaintiffs and United States relating to the withheld proceeds [of the sale of the 64 Revere Street property]” and over “disputed monies from the sale proceeds [of other properties sold pursuant to the Receivership Order].” Order of Partial Remand at ¶¶ 3-4 [24].

         After proceedings began in this court and prior to the end of 2018, the Receiver sold additional properties in Massachusetts and Utah. Plaintiffs, the United States, and the Receiver jointly filed a motion for a stipulated order, to which Defendant did not object. The court entered the Stipulated Order Allowing the Payment of Federal Taxes with Right to Recovery if Plaintiffs Prevail [56], which provided for the Receiver to pay federal capital gains taxes on the properties sold by the Receiver, without any waiver of rights, and for those federal capital gains taxes to be returned, if appropriate, after a final order of the court. Stipulated Order [56]. The Order also instructed the Receiver to retain the funds necessary to pay taxes on the sale of the Massachusetts and Utah properties, and to retain money that was to be paid to Defendant under the Liquidation Plan, also pending final order of the court. Id. The Order further instructed the Receiver to pay Plaintiffs a portion of the proceeds of the property sales. Id.

         II. Analysis

         Plaintiffs request that the court find that the Receivership Order, as issued, mandates the Receiver to pay Plaintiffs funds towards satisfaction of their judgment from the sale of property, without first paying taxes that arise upon that sale. The United States seeks an order declaring that the United States is entitled to payment of federal capital gains taxes by the Receiver before funds are distributed to Plaintiffs. Defendant agrees that the Receivership Order provides for payment of taxes, arguing that he agreed to waive his homestead rights based upon that understanding and expressing concern about tax liability. The Receiver seeks the court's interpretation of the Receivership Order and instructions about the further disbursement of taxes.

         1. “Applicable Taxes” Under the Receivership Order as Issued

         Plaintiffs first argue that “applicable” taxes under the Receivership Order is limited to tax claims that take priority over Plaintiffs' claims, which Plaintiffs contend are no claims. The relevant part of the order states, “[t]he receiver is authorized to disburse to the plaintiffs…the proceeds from the liquidation of any Asset, after the payment of all applicable federal and state income taxes or capital gains taxes, until the defendant's obligations to the plaintiffs… are satisfied in full.” Receivership Order ¶12 [31-2] (emphasis added). The Receivership Order thus contemplates that “applicable taxes” are to be paid after the sale of the asset and prior to disbursements of payments to Plaintiffs. The United States argues that “applicable taxes” are taxes that apply to the proceeds of a sale when Defendant's assets are sold. Plaintiffs contend “applicable taxes” are taxes that would take priority over Plaintiffs' judgment. In context, the government's interpretation is more plausible as “applicable” can be understood to refer to the specific sale, and the sentence read in this manner contemplates taxes that arise from the liquidation of an asset, and not taxes for which prior liens have been asserted.

         This interpretation is confirmed by reading this sentence in the context of another provision of the order. To the extent that Plaintiffs argue that “applicable taxes” refers to taxes or liens in effect prior to Plaintiffs judgment, such liens are addressed in a separate provision of the Receivership Order, where the Receiver is instructed to sell Defendant's assets “subject to any prior liens.” Id. ¶5 [31-2]. Under Plaintiffs' reading, the term “applicable taxes” would thus be surplusage. Instead, the “applicable” taxes referred to in paragraph twelve are the taxes that arise upon the sale of property.

         2. Modification of Receivership Order

         (a) Court's Authority to Consider Plaintiffs' Alternative Request ...


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